Cryptotokens and cryptocurrencies: the extensive margin

The supply of cryptotokens or cryptocurrencies can be indefinitely expanded on the extensive margin by introducing new cryptotokens and cryptocurrencies. Here we propose a theoretical model in which this extensive margin is endogenous. We do so by considering the choice of entry and subsequent competitive dynamics among blockchain-based decentralized digital platforms, each having an associated cryptotoken. We find that, if there are developers who can self-finance the development of their platforms, then the equilibrium is a monopoly in which a single platform (and a single token) enters the market. If these developers are absent, then entry is possible only by holding an Initial Coin Offering (ICO). We show that ICOs weaken incentives, because in equilibrium there is a strictly positive probability that a developer who held an ICO will then liquidate all his tokens and hence stop the development of his platform. This, however, stimulates entry because each developer might become a monopolist with strictly positive probability. We show that, under certain conditions, welfare is higher when multiple developers enter via ICOs than when a single developer self-finance the development of the platform.